Inheritance Tax explained — thresholds, allowances, and how to pay

What is Inheritance Tax?

Inheritance Tax (IHT) is a tax on the estate of someone who has died. It is charged at 40% on the part of the estate that exceeds the available allowances (called “nil-rate bands”).

Only around 4–5% of deaths in the UK result in an IHT liability — most estates are below the threshold. But when IHT is due, the amounts can be significant.

The nil-rate band (NRB)

Every individual has a nil-rate band of £325,000 (as of May 2026). IHT is charged at 0% on the first £325,000 of the taxable estate.

The nil-rate band has been frozen at £325,000 since 2009 and is currently frozen until at least April 2030.

Transferable nil-rate band

If the deceased was married or in a civil partnership, and their spouse or civil partner died before them, any unused portion of the spouse’s nil-rate band transfers. If the spouse used none of their NRB (i.e. left everything to the deceased), the full additional £325,000 can be claimed — bringing the total NRB to £650,000.

The residence nil-rate band (RNRB)

An additional allowance of £175,000 applies if:

• The estate includes a residential property (or the proceeds of a former home sold after 8 July 2015), and
• The property passes to direct descendants — children, grandchildren, step-children, adopted children (but not siblings or nieces/nephews)

The RNRB is tapered for larger estates: for every £2 the net estate exceeds £2,000,000, the RNRB reduces by £1. It disappears entirely for estates above £2,350,000.

As with the NRB, any unused RNRB from a predeceased spouse can transfer — potentially adding a further £175,000, bringing the maximum combined threshold to £1,000,000 (£325k + £325k NRB + £175k + £175k RNRB).

Exemptions

Some assets and transfers are exempt from IHT entirely:

• Spouse/civil partner exemption — assets left to a surviving UK-domiciled spouse or civil partner are entirely IHT-free, regardless of value
• Charity exemption — gifts to registered UK charities are IHT-free. If at least 10% of the net estate goes to charity, the IHT rate on the remainder reduces to 36% (instead of 40%)
• Business property relief (BPR) — up to 100% relief on qualifying business assets held for at least 2 years
• Agricultural property relief (APR) — up to 100% relief on qualifying agricultural land and buildings
• Pensions (currently) — defined contribution pensions with a named beneficiary are generally outside the estate for IHT under current rules. From April 2027, unused pension funds will be brought into the taxable estate. If the estate includes significant pension assets and is unlikely to be fully distributed before April 2027, take specialist pension and IHT advice promptly — the rules change will increase many estates’ IHT liability significantly
• Life insurance written in trust — if a life insurance policy is written in trust, the payout goes directly to beneficiaries and is outside the estate

How to calculate IHT

1. Total all assets at date-of-death values (gross estate)
2. Deduct all liabilities (mortgage, loans, funeral expenses)
3. Deduct spouse/civil partner exemption and charity exemption
4. Calculate the available nil-rate bands (NRB + transferable NRB + RNRB + transferable RNRB, minus any gifts in the 7 years before death)
5. IHT is due at 40% on the taxable estate (net estate minus exemptions minus nil-rate bands)

Example: Net estate £700,000. Married couple, spouse died earlier and left everything to the deceased (full NRB transfer available). Property worth £400,000 passes to children (RNRB applies). No charitable gifts.

• Available NRB: £325,000 + £325,000 (transferred) = £650,000
• Available RNRB: £175,000 + £175,000 (transferred) = £350,000
• Total threshold: £1,000,000
• IHT due: £0 (net estate £700,000 < £1,000,000 threshold)

The payment deadline

IHT must be paid within 6 months from the end of the month in which the death occurred. For example, if the date of death is 15 March, the deadline is 30 September of the same year.

If payment is late, HMRC charges interest at the official rate (currently 7.75% per annum) from the deadline date. Interest compounds daily and cannot be appealed.

How to pay before probate: the Direct Payment Scheme

This is one of the most important practical steps executors overlook. There is a catch-22: you need probate to access the deceased’s bank accounts, but you need to pay IHT before probate is issued. The Direct Payment Scheme solves this.

Most major UK banks and building societies will pay HMRC directly from the deceased’s account, before probate is granted, using a form called IHT423. Here’s how it works:

1. Complete the IHT400 and get your IHT reference number from HMRC (apply online or by calling HMRC Inheritance Tax)
2. Complete form IHT423 (one per bank/building society account you want to use)
3. Send IHT423 to each bank alongside a copy of IHT400. They will transfer the funds to HMRC directly
4. HMRC will issue a receipt confirming IHT is paid — this is needed for the probate application

Not all banks participate. Most major high street banks (Lloyds, Barclays, HSBC, NatWest, Nationwide) do, but you should confirm with each bank before relying on this. National Savings & Investments (NS&I) also participates. The scheme only works for accounts where the deceased was the sole account holder.

What if HMRC challenges a valuation?

HMRC has up to 5 years from the date of filing to open an enquiry into the estate valuation (under s221 IHTA 1984). Enquiries are most common for:

• Property values close to or above the IHT threshold
• Business or agricultural property relief claims
• Estates with significant listed or unlisted shares

An enquiry can delay the final clearance letter from HMRC by many months and may require a formal RICS valuation or professional correspondence. To reduce the risk:

• Use a RICS-qualified surveyor for property valuations rather than an estate agent’s estimate. The RICS “Red Book” methodology is HMRC’s expected standard for challenged valuations
• Keep all supporting evidence — bank statements showing balance at date of death, share certificates, valuation reports
• If HMRC opens an enquiry, consider engaging a specialist tax adviser or probate solicitor. This is one of the complexity factors TidyEstate will flag and refer you for professional help

Do I need to complete an IHT400?

Not always. If the estate qualifies as an “excepted estate” (broadly: net estate below the available threshold, with no complex assets), you can use a simplified online declaration instead of the full IHT400. TidyEstate will tell you which applies to your estate.

If the full IHT400 is required, TidyEstate gives you the figures from your estate profile and the payment deadline. A pre-filled IHT400 with the supplementary schedules your estate needs (IHT402 for transferable NRB, IHT405 for property, IHT406 for bank accounts, etc.) is being checked against HMRC’s current forms and will be added to the paid pack once that review is complete.